Employers face a thicket of state and federal laws that govern pre-employment background screening. Now, these laws are in flux because legislators and policy enforcers are scrutinizing the use of criminal records and credit histories in hiring decisions.

With a law that took effect Jan. 1, Illinois became the fourth state to restrict the use of credit histories in hiring decisions. Similar measures have been narrowly defeated in other jurisdictions, and the previous U.S. Congress introduced a bill on the subject but did not vote on it.

In November 2010, Massachusetts became the second state, after Hawaii, to prohibit private employers from asking job applicants about their criminal records on initial written applications. Massachusetts already prohibited the question on public-sector job applications, as do several other states and more than two dozen cities and counties. The laws and policies require employers to wait until later in the hiring process to ask applicants about their criminal records.

These examples do not constitute a complete list, and the scrutiny is not likely to subside. Behind the debates lie two fundamental values that often conflict:

Employers’ rights to maintain safe workplaces and to conduct business without interference.

Individual rights to privacy and to fair treatment in the job market.

In this uncertain environment, the best way to avoid legal problems is to mind your p’s and q’s—the practices you follow and the questions you ask when using criminal records and credit histories in hiring decisions.

Perceptions About Credit Reports

Employers commonly use pre-employment screening tools, so policy-makers were bound to get involved—especially given the pressures they face from constituents who express concerns about:

Privacy and identity theft.

A proliferation of databases, which are not always up-to-date.

Incomplete or inaccurate courthouse records.

The difficulty job hunters have in a weak economy.

Everyone getting a fair shake.

The pressures are inflated by the Internet, where rumors abound about how credit histories are being used—and misused—in hiring decisions. In the past decade, employers have increased their use of all types of background checking, but a recent Society for Human Resource Management (SHRM) poll shows that the use of credit reports has not increased in the past five years. Contrary to public perception, exaggerated by misinformation on the Internet, credit histories are mostly used sparingly, legally and wisely in hiring decisions.

“The perception that employers are ordering massive amounts of credit reports is nothing like the truth,” says Lester S. Rosen, chief executive officer of ESR Inc., a background-screening company in Novato, Calif., and author of
The Safe Hiring Manual (Facts on Demand Press, 2007).

Nonetheless, employers’ use of credit reports has come under fire.

Hawaii, Illinois, Oregon and Washington have laws restricting the use of credit reports in hiring decisions. Similar bills have been or are being considered in other jurisdictions. The California legislature approved a bill that was later vetoed by the governor. Maryland legislators narrowly voted down a bill twice.

And the Equal Employment for All Act (H.R. 3149), introduced in the last Congress, would have amended the Fair Credit Reporting Act of 1970 to further restrict the use of credit reports. The latter already mandates a clear process for checking credit history that includes candidate authorization and other protections. For instance, employers cannot use a numerical consumer credit score in hiring decisions.

Colleen Parker Denston expects the restrictive bill to be proposed again in Maryland. The HR director at Worcester Preparatory School in Berlin, Md., argues that the measure is aimed at a small number of employers that do not follow the better practices most employers use when they check credit. As the legislative affairs director for SHRM’s Maryland State Council, she has testified at Maryland hearings and before a subcommittee in the U.S. House of Representatives, summing up the argument offered by opponents, including SHRM’s lobbyists.

Are the Laws Really Necessary?

Here’s the gist of that argument: The Fair Credit Reporting Act adequately protects against inappropriate use of credit histories. Most employers understand that only candidates for positions with significant financial or fiduciary responsibility might need credit checks, and many employers never check credit. Those that do usually wait until after a contingent job offer has been made. Most discuss unfavorable reports with candidates to check accuracy and understand the context, and most discount debt from medical bills, student loans and foreclosures. Rarely is credit history cause for denying employment.

Not every employer uses common sense with credit checks, but “the majority do the right thing,” Denston insists.

She says only three of her school’s 120 full- and part-time jobs would require credit checks—business manager, business manager’s assistant and Denston’s position. Even the headmaster would be exempt because “the headmaster has no fiduciary responsibility,” she explains.

For some occupations, credit checks are required by state agencies, bonding agencies or customers. Police recruiters typically run them on everyone to ferret out candidates susceptible to bribes.

But in places where one might assume they are used, they often aren’t. OfficeMax Inc., an office supplies retailer with about 30,000 employees, conducts no credit checks, even though thousands of its workers handle money, according to Mary Bryan, vice president of HR field operations.

Many other retailers similarly do not run credit checks. Even though clerks handle a lot of money, they have to balance the cash registers at the end of each day, says Laura Randazzo, chair of the National Association of Professional Background Screeners in Morrisville, N.C., and vice president of global services for Accurate Background Inc. in Lake Forest, Calif. “I don’t have any clients in retail who do credit histories for store clerks,” she notes.

At the U.S. House hearing, Denston says, supporters of H.R. 3149 were concerned about discrimination against minorities, who are more likely to have credit problems because of the recession. She says secretarial positions also seemed to be a focus of concern. Yet according to Denston, Randazzo and others, secretaries rarely become subjects of credit checks.

“If any bill passes, it should represent what organizations already do,” Denston says.

The Illinois law appears to do just that. It contains exceptions that allow credit checks in many situations. “The exceptions basically swallow the rule,” says Pamela Devata, a partner in the Chicago law office of Seyfarth Shaw LLP.

Rising Number of Complaints

There’s some evidence—though not a lot—that the state laws address a real problem.

In 2009, the U.S. Equal Employment Opportunity Commission (EEOC) received more complaints than in previous years about job discrimination due to the use of credit histories, according to Chair Jacqueline A. Berrien. An exact number was not available, but the total was in the hundreds, she says. The commission has a mandate to investigate these allegations and can pursue legal options, usually class-action suits.

In December 2010, for example, the commission announced a class-action suit against Kaplan Higher Education Corp., a nationwide provider of postsecondary education, alleging it engaged in a pattern or practice of unlawful discrimination by refusing to hire a class of black job applicants nationwide. The suit alleges Kaplan rejected job applicants based on their credit histories and that this practice has an unlawful discriminatory impact because of race and is neither job-related nor justified by business necessity.

In another example, the EEOC filed a class-action suit against Freeman Cos., a Dallas-based event planner in 2009, alleging that Freeman engaged in a pattern of discrimination under Title VII of the Civil Rights Act of 1964 by rejecting black, Hispanic and female job applicants on the basis of credit histories. The case,
EEOC v. Freeman, is pending.

In October 2010, the commission held a public hearing on whether credit history has or could have discriminatory impact, Berrien says. “Screening is affecting many people because of the large number now seeking employment,” she adds.

Some witnesses argued that:

The use of credit reports is a growing practice that is unfair to workers.

Misuse of credit histories could prevent economic recovery for millions.

Credit reports have inaccuracy rates that are unacceptable for use in hiring decisions.

Witnesses cited studies that purport to show that credit history does not predict job performance.

Those studies were included in an analysis of research on this topic conducted for the EEOC by Michael G. Aamodt, a principal with DCI Consulting Group Inc. in Washington, D.C. “There is little research exploring the implications of using credit checks in employment decisions,” Aamodt told the commission. “Any conclusions would be premature.”

SHRM was represented at the public hearing by lawyer Christine V. Walters, SPHR, of Westminster, Md., who says, “The problem is mostly anecdotal. There is some research that there is adverse impact. I think many of us—panelists and commissioners—agreed we need more research to determine if there truly is a validated correlation between use of credit and members of groups denied employment. We also need to look at all those who have stolen, embezzled or committed fraud and see whether they had credit problems.”

The next step: Commissioners must decide whether to issue new guidance on credit reporting, Berrien says.

Criminal Records: What to Ask, When

Federal and state officials want to know whether asking about criminal history on job applications has any discriminatory effect. Several public-sector employers think it does and have “banned the box,” a reference to removing the check boxes on applications that ask if the applicant has ever been arrested or convicted of a crime.

The city of Boston, with 17,000 employees, banned the box in 2006. Its recruiters do not check criminal records for all jobs. “We are telling applicants criminal background doesn’t matter for large numbers of jobs. So why are we still asking the question?” asks Bill Kessler, assistant director of HR. Kessler concluded that affirmative answers had “an effect on decision-making” too soon in the hiring process. He adds, “We don’t want a city that creates an underclass or keeps people out of work.”

More than two dozen cities and counties and at least five states have narrowed questions on their applications to cover only felony convictions or have stopped asking entirely about criminal history. Some, including Boston, apply the policy to contractors.

The city council of Austin, Texas, a city with 12,000 employees, voted unanimously to ban the box in 2008 in support of efforts to rehabilitate 25,000 ex-felon residents. The city wants every applicant on equal footing at the start of the hiring process. Austin does not check criminal records for all jobs, and uses such checks only when the hiring manager is ready to make an offer. “There was a desire to remove barriers that would prevent ex-offenders from reintegrating into the workplace,” says Mark Washington, HR director.

Screening experts note that local governments bear the financial brunt for the failure to reintegrate ex-felons into society. “With ‘ban the box’, applicants can be considered without pre-judging,” Rosen says. “From a government point of view, it makes sense to get people back to work and to avoid the extra costs of social services. Private employers prefer to ask upfront.”

For example, recruiters for Ceridian Corp. in Minneapolis, an HR administration and payroll outsourcer with 8,000 employees, want to know early if there are felonies. “You cannot have a crime of theft or of abuse or violence, nor a drug-distribution type crime” to be considered for employment, says John Higgins, SPHR, vice president of talent acquisition.

New Rules, Old Rules

Private employers in Massachusetts will need to change their job applications. They must now comply with the state law that prohibits asking questions on an “initial written application form” about “criminal charges, arrests and incarceration.” Lawyers opine that questions would be allowed later in the process, but the law is not precise.

The fact that Massachusetts and Hawaii have ban-the-box laws for the private sector and 48 states do not illustrates an overarching problem: There is little consistency among state laws for the use of criminal records and credit reports in hiring. This is one reason most multistate employers hire background-screening partners. Walters says, “It is a full-time job to stay in tune with legislation.”

Maurice Emsellem, an attorney and policy co-director in the Oakland, Calif., office of the National Employment Law Project, applauds the Massachusetts law. In addition to removing the stigma of having a criminal record, “it requires employers to take a new look at their policies.”

Emsellem says he encounters many employers, especially large companies, that fail to comply with the Fair Credit Reporting Act, Title VII, and federal and state anti-discrimination laws. “Don’t have blanket policies that someone with a felony can’t work,” he advises.

In 2008, the EEOC filed a class-action suit against Peoplemark Inc., an employment agency in Grand Rapids, Mich., alleging that it discriminated by refusing to hire any person with a criminal record, thereby creating a disparate impact on black applicants. The case was voluntarily dismissed in 2010 without explanation.

In 2010, the New York attorney general’s office settled out of court with Radio Shack regarding unlawful discrimination against job applicants for rejecting employment applications and withdrawing conditional offers based on criminal histories without considering several factors required under state law. Emsellem urges employers to pay attention to these cases and “take a new look at procedures to make sure they are fair and not arbitrary.”

The author, technology contributing editor for HR Magazine,
is a freelance writer based in Prunedale, Calif.

Improve Practices for Checking Criminal Records and Credit Histories

Each city department in Boston conducted its own criminal background checks until 2002. Reacting to concerns about unfair practices, the city’s HR professionals investigated and found little consistency among departments.

“With approval of the mayor, we embarked on a path to centralize the function for criminal background checks,” says Bill Kessler, assistant director of HR. “We put through a consistent policy. We now do it for all departments with the exception of the police, who handle their own. Our office reviews the record and determines if there would be a problem to proceed with hiring.”

Practices now include the following:

The application does not ask questions about convictions.

Hiring managers do not conduct a background check until they are ready to make an offer.

Most, but not all, jobs require checks.

A criminal record does not automatically preclude employment.

If a criminal record is found, an HR professional talks to the candidate to make sure it is accurate.

The HR professional decides if the candidate is still fit for the job.

The hiring manager gets a thumbs up or thumbs down and is not privy to what’s in the record.

“We try to be very sensitive with the kind of checking we do,” Kessler says.

Employers conduct pre-employment criminal background checks to guarantee safe workplaces and to avoid negligent hiring lawsuits. But if employers aren’t careful, they can attract attention from the U.S. Equal Employment Opportunity Commission (EEOC) and state attorneys general.

“The integrity of the process matters,” explains Mary Bryan, vice president of HR field operations for OfficeMax Inc.

Procedural consistency is important throughout the organization, and criteria consistency is important within job groups. “Not all janitors are background screened the way you screen accountants, but janitors should be screened consistently with janitors,” explains Lester S. Rosen, chief executive officer of ESR Inc.

HR professionals for the city of Austin, Texas, review job groups once a year to make sure they apply the right criminal check criterion. There’s a higher standard for employees working with the elderly, youth, people with disabilities or finances than for employees working on a maintenance crew, says Mark Washington, HR director.

“Employers get in trouble when they engage in automated decision-making,” Rosen says. “There always should be a human review to make sure you’re making the right decision.”

Many employers outsource background screening. If chosen wisely, a partner will help establish protocols and consistent practices, and help eliminate inappropriate use of results.

“By consolidating with one vendor, we got consistency in what we background checked for,” says Larry Fultz, chief HR officer at Vanguard Health Systems in Nashville, which has 17 hospitals and 35,000 employees.

Before acquiring a partner, be sure to know “the vendor’s ability to maintain compliance with the Fair Credit Reporting Act,” Bryan recommends.

The act spells out procedures for conducting credit checks and limits on information that can be reported by a screening company. Many people don’t know that the act also covers criminal background checks, Rosen says. The act is specific about the procedures an employer must follow if denial of employment results from a check.

Rosen says a good background-screening partner makes sure the employer is in compliance with the act and other laws, abides by adverse action rules, conducts consistent checks within job groups, and follows EEOC guidelines for using criminal reports.

—Bill Roberts

A Screening Worst Practice

A Wall Street company was ready to hire a candidate for a high-level position but discovered an arrest record in the FBI database, a fact the candidate had neglected to mention. A private investigator confirmed the arrest for breaking and entering years earlier in Atlanta, but that’s all the investigator could find. So the investigator asked the candidate to explain.

When the man was transferred from Atlanta to New York City, he could not sell his house and had to rent it. Later, the tenants moved without paying the rent. He flew to Atlanta to check on his property, only to find that they had changed the locks. While he was prying open a window, someone called the police, and he was arrested. Being a Friday, he spent the weekend in jail before he could get legal help. No charges were pressed, but the arrest stayed on the record.

“We had to dig deeper to confirm the charges were dismissed. Even in Fulton County, Ga., you still need boots on the ground,” says Ken Springer, the investigator and president of Corporate Resolutions Inc., a background-screening company.

He says relying only on online databases is one of the worst practices.

Even the FBI database, considered the gold standard, is incomplete, he adds. And the FBI database is only available to certain government agencies and to private employers for conducting background checks on candidates in certain professions. Omissions occur because each state reports differently. Some only report convictions. Some report arrests and convictions. Some states expunge misdemeanors; others do not. In some, first arrests with no convictions are wiped clean; in others, they’re not.

“Many of the people in these databases never go to jail,” Springer advises. If you find a record, talk to the candidate. “Don’t have an inquisition. Have a conversation.”

Discuss Criminal Background Screening and Credit Checks

Share your experiences with background screening. Are federal or state regulations affecting your ability to use these tools?

As a recruiter or as a job applicant yourself, have you ever been witness to false positives on either criminal background checks or credit checks? What happened?

Reality Check for Credit Checks

By Bill Roberts

At hearings on the use of credit reports sponsored by the U.S. Equal Employment Opportunity Commission, witnesses concerned about discrimination often cited a Society for Human Resource Management (SHRM) survey as showing widespread use of credit checks. Consider this from a representative of the Lawyers Committee for Civil Rights Under the Law in New York:

“Credit checks are becoming an increasingly prevalent practice in the employment sector. According to a survey, approximately 60 percent of its employer members use credit checks as a hiring tool, compared to 35 percent of employers in 2001. Some employers report that they use credit checks in hiring for all positions.”

But the survey of 433 randomly selected SHRM members, conducted in late 2009, also supports this conclusion: 87 percent of SHRM members use credit checks very selectively or not at all, and 40 percent use no credit checks. The 47 percent that selectively use credit reports mainly do so for positions with financial responsibility, for other senior executive positions and for positions with access to confidential employee information.

As for the rise in the use of credit reports, all types of screening have increased since the Sept. 11, 2001, terrorist attacks. But based on an analysis comparing survey responses from 2010 with those from 2004, SHRM researchers concluded that the use of credit checks did not increase during that period.

And there’s evidence that the use of credit reports has declined more recently. In its 2010 benchmark study, HireRight Inc., a background-screening company in Irvine, Calif., found that 32 percent of 1,800 respondents said their organizations conduct credit checks, down from 42 percent in 2009.

The author, technology contributing editor for HRMagazine, is a freelance writer based in Prunedale, Calif.